Problem Set #6 Answer Key
Assume that the dividend has yet to be paid.
Since the firm has a 100% payout
policy, the entire net income, $32,000 will be paid as a dividend.
current value of the firm is the discounted value from 1 year hence, plus the
The current price of $141.20 per share will fall by the value of the dividend to
$32,000 net income
10,000 shares outstanding
According to MM, it cannot be true that the low dividend is depressing
Since dividend policy is irrelevant, the level of the dividend
should not matter.
Any funds not distributed as dividends add to the
value of the firm hence the stock price.
These directors merely want to
change the timing of the dividends (more now, less in the future).
calculations below indicate, the value of the firm is unchanged by their
Therefore, share price will be unchanged.
To show this, consider what would happen if the dividend was increased
Since only the existing shareholders will get the dividend, the
required dollar amount is $4.25 x 10,000 shares = $42,500.
dollars to be raised are:
$42,500 required funds